Lagarde Calls for More Global Coordination as QE Exits

International Monetary Fund Managing Director Christine Lagarde urged policy makers to work more closely together as they plan eventual exits from unconventional monetary policies, endorsing swap arrangements between central banks as an instrument to weather instability.

While there’s no agreement about the impact of measures taken by central banks such as the Federal Reserve or the Bank of Japan, officials need to better understand the potential spillovers, Lagarde said in prepared remarks for an annual Fed conference in Jackson Hole, Wyoming. If the scaling back of stimulus creates renewed financial turmoil, some countries may not be able to withstand it on their own, she said.

“We need further lines of defense -- lines of defense that reflect our interdependence, our common purpose, and our mutual responsibility for the global economy,” Lagarde said at the event sponsored by the Kansas City Fed. “Swap lines -- along the lines provided by major central banks early in the crisis -- can help,” and the IMF stands “ready to provide policy advice and financial support,” she said.

The effects of the Fed’s potential tapering of its $85 billion in monthly bond purchases are showing in global markets. Emerging economies have seen an exodus of cash, with their 20 most-traded currencies falling about 4.4 percent in the past three months, according to data compiled by Bloomberg.

Recovery Path

“We are all globally on a path to recovery, still fragile, not yet strong enough, and with this very strong support from the unconventional monetary policy,” Lagarde said in a Bloomberg Television interview with Sara Eisen.

Lagarde said that “clarity of when things will happen, how things will happen” is needed as the Federal Reserve considers unwinding its bond buying program in order to minimize the impacts on financial markets and the effect on emerging markets.

“The signaling effect matters almost more than the actual implementation,” she said.

As the global economy recovers, Lagarde said she thinks the IMF may shift to a role in which emerging economies use the fund’s precautionary instruments to insure their economies.

“The IMF will continue to be prominent if it really focuses on its members’ needs,” according to the IMF chief.

Currency Intervention

For countries that haven’t deployed unconventional monetary policies, exchange-rate flexibility “will help, but not at all costs,” Lagarde said in her prepared remarks. “Some market intervention may help moderate exchange-rate volatility or short-term liquidity pressures.”

Advanced and developing economies have done a good job managing the implications of unconventional monetary policies, she said, using a phrase that often describes asset purchases by a central bank to support growth. More needs to be done to enable a smooth exit later, Lagarde said.

“Policies and policy coordination are not yet where they need to be,” Lagarde said. “Failing to act at the global level, with each country playing its part, could put the global recovery at risk.”

Needed measures include repairing the banking system in the euro region in order to unblock credits to companies, she said. For central banks preparing for exit, it means communicating clearly about all the factors that will influence their decisions, including financial stability, she said.

Countries that don’t have such unconventional policies need to take all the measures they can to strengthen their economies, Lagarde said. When facing instability, they have used measures to slow excess such as “frothy credit growth,” Lagarde said.

“Yet even with the best of efforts, the dam might leak,” she said, supporting swap lines similar to the liquidity that the Fed agreed to provide during the global financial crisis to countries including South Korea and Brazil.

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